How to record a hire purchase

How to record a hire purchase

A hire purchase agreement allows you to claim GST on an item before it is fully paid. To ensure accurate financial reporting, it is essential to record the transaction correctly in Farm Focus.

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NOTE: We strongly advise consulting with your accountant about best practices for managing hire purchases.

Before you start

Locate your Hire Purchase (HP) agreement or invoice and note the following details:

• Purchase price of the item.

• Deposit amount (if applicable).

• Trade-in value (if applicable).

• Remaining amount to be financed.

Recording a hire purchase in Farm Focus

A. 100% financed hire purchase

Scenario: Adam purchases a new Honda TRX420 for $13,794.25 (inc. GST) and trades in a Honda TRX500 valued at $5,000 (inc. GST). He does not pay a deposit, so $8,794.25 is financed.

Steps to record:

1. Create a Money Out Invoice.

2. Enter the Date, Other Party, and Reference as per the HP agreement/invoice.

3. Set the A/C (bank account) to the account from which future HP payments will be made.

4. Leave the Amount as $0.00, since no money has moved.

5. Code the new asset purchase:

   • First line: Code to ASSET:V (Asset Purch or Sold: Vehicle) as an expense.

   • Second line: Code the trade-in as income under ASSET:V (Asset Purch or Sold: Vehicle).

   • Third line: Code the remaining financed amount to LP:HP (Loan Repayment: Hire Purchase) as income.

6. Ensure the invoice balances to $0.00.

7. Click Save.

TIP: Check whether the invoice is GST inclusive or exclusive and ensure Farm Focus reflects this.

B. When a deposit has been paid

Scenario: Adam purchases a Honda TRX420 for $13,794.25 (inc. GST) and trades in a Honda TRX500 valued at $5,000 (inc. GST). He pays a $3,500 deposit, leaving $5,294.25 to finance.

Steps to record:

1. Create a Money Out Invoice.

2. Enter the Date, Other Party, and Reference as per the HP agreement/invoice.

3. Set the A/C (bank account) to the account from which future HP payments will be made.

4. Enter the deposit amount in the Header Amount.

5. Code the new asset purchase:

   • First line: Code to ASSET:V (Asset Purch or Sold: Vehicle) as an expense.

   • Second line: Code the trade-in as income under ASSET:V (Asset Purch or Sold: Vehicle).

   • Third line: Code the remaining financed amount to LR:HP (Loan Repayment: Hire Purchase) as income.

6. Click Save.

Recording future hire purchase payments

• Code each payment to LR:HP (Loan Repayment: Hire Purchase).

• These payments are GST-exempt, as the GST has already been claimed.

Additional tips

• Attach a copy of the HP agreement to your records.

• For machinery purchases, add a note including the trade-in model and serial number to assist with end-of-year accounts.

• Update the Asset Register to reflect the new asset and remove the old one.

• Set up a repeating Money Out Invoice for future HP payments to streamline record-keeping.

Troubleshooting

Why is the remaining HP/Finance amount displayed as income? The hire purchase functions like a loan. The remaining amount is displayed as income because it represents introduced funds or a loan drawdown. As payments are made, the outstanding amount decreases, similar to a loan repayment.